Diverse Revenue Streams

Many entrepreneurs starting out tend to spot a gap in the market for a product or service and fill that gap with their solution.

October 02, 2018


Many such ventures are highly successful as one just has to consider the likes of Facebook or Google (Alphabet) with their core offerings. However, there are plenty of examples of highly successful businesses that fail because they were over-reliant on one principal revenue stream. Here we can think of Blackberry and Nokia, both companies that were once dominant global competitors in the mobile handset space.

One does not often consider that major globally dominant companies such as Apple, Alphabet and Facebook fall into the trap of relying too heavily on singular revenue streams. However, a quick analysis of the 2016 financials for these companies is very revealing.

 

Google AdWords contributes 88% to Alphabet’s revenues, the iPhone 63% of Apple’s sales; and Facebook Ads constitutes a whopping 97% of that company’s revenues. And yes, we are not suggesting that these companies are about to fail, however, if the market dynamics change due to new technologies, the results could be disastrous.

Often, this malaise is found in SMEs too, where the entrepreneur has managed to carve out a successful business in a relatively confined market, for example a city, region or country in Africa and are content to continue in that vein. Or they may have managed to successfully develop a technology product that solves a real-world problem and the business is scaling rapidly.

 

This is a high-risk attitude to adopt as the threats from competitors and their new product or service developments will readily eat their lunch, especially as success attracts competition.

Of the other major technology companies, Amazon Products contributes 72% to Amazon’s sales line, however, the Amazon store is itself hugely diversified, thereby mitigating risk. Microsoft has developed the most defensive product mix of the major technology companies, with 28% from Office, 22% from Azure (its Cloud product), 11% from XBOX, and 18% from “Other”, creating a diverse range of revenue streams.

 

The solution for the SME owner is to firstly establish a sound financial foundation for the business, then actively seek other products, services or markets that are compatible with its core competencies. Businesses can essentially increase revenues only by growing the product mix, by seeking new markets, or a combination of both. These strategies do consume huge amounts of human and cash resources, so the business needs to be financially stable before embarking in these new directions.

 

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